By Matt Barrett, CEO, Adaptive Financial Consulting.
Technology has transformed financial services over the past decade – dramatically increasing efficiencies, simplifying some workflows and improving accessibility – benefiting everyone from large institutions to fintech start-ups. In this constant race to embrace technology, digitalisation has gone from being a ‘nice to have’ to becoming ubiquitous – to be without it is to be left behind. While digitalisation has revolutionised the sector, it has left firms with a dilemma – how do you differentiate when nearly all firms have ‘gone digital’?
Pre-digitalisation, financial services firms would differentiate themselves through human talent with specialised skillsets. The shift to digitalisation has automated many processes and has ushered a boom in vendors offering ‘off the peg’ solutions, making it, on the surface, easier than ever before to assemble digital building blocks into a solution. These solutions can be cost-effective, but they carry a hidden cost of dulling a firm’s edge when competitors can easily bolt on the same technology to their offering.
Buying vendor technology can be perceived to deliver instant innovation at lower cost and require fewer resources. With a growing complexity of features and functionalities, new order types, new venues, new liquidity pools and new market data feeds, there is a continuous need for systems to adapt to the full value chain very quickly. In the short-term, vendor-based solutions can be seen to deliver on this and level up a firm’s offering, but they can also significantly curtail a firm’s ability to tailor a technology stack, which they do not own, to their future needs.
Furthermore, third-party solutions can be difficult to migrate from once they are embedded, and vendors have less of an incentive to innovate. This can be problematic as market structure and client needs change over time, meaning that firms have to go through a vendor to tweak an off the peg solution or wait until a new vendor solution is available to all.
This technology arms race, where firms add more and more vendor solutions to keep up with competitors, risks creating increasingly complex workflows without the right flexibility, which ultimately will prevent firms from delivering on what their clients need. It is easy therefore to see that while costs are saved in the short-term, building and owning these processes makes more financial sense in the long-term, provided they are designed with flexibility in mind, especially for businesses which operate in a highly competitive industry such as trading.
Financial institutions understand their clients better than anyone and spend many years tailoring their services based on specific needs that may not be fulfilled by a generic solution. Building solutions from the ground up puts firms in control of their offering and allows them to channel their knowledge of clients and their market into an effective solution. It also gives firms a USP as they are able to retain ownership of the technology’s intellectual property and build their own innovation roadmap to maintain their competitive advantage.
Building a tailored technology stack from the ground up requires an involved planning process, highly skilled developers to build the product and resource to deliver and maintain the technology. Skilled developers are a hot commodity and come at a price – as seen in the fierce competition among some of the most sophisticated firms in the industry – as well as with an added risk of losing talent with critical knowledge of one’s firm and systems to other firms.
It therefore makes sense that firms that do not want to run their own highly competitive technology businesses in house may look to outsource this expertise to technology partners who can provide the talent not readily available in-house – allowing specialists to build proprietary technology stacks while securing and owning the IP to create competitive advantage.
This approach may not be suited to all and will depend on a firm’s focus on technology, its budget, resources, and client base – it is not a binary choice. The approach also depends on the type of asset class you are trading, whether the asset is listed or traded over-the-counter, whether you are a buy-side or a sell-side, and finally, whether you are an agency or prop business.
While some firms will be happy with plug and play white label technologies and APIs, for those who are seeking to gain an edge in a highly competitive and increasingly commoditised industry, the ability to take control of their own technology means the ability to take control of their own future and determine the pace of innovation.
The build vs. buy debate has changed as technology has become ubiquitous. It is time to understand that there is a cost to the technology choices that firms make. Short-termism and lack of flexibility may end up costing more in the longer-term, not just in terms of price, but in terms of competitiveness and long-term viability.